Canadian C2+ Petrochemical Report

Volume 22 Issue, September 2006

CORPORATE

Dow exits from Sarnia, closes EDC at Fort Saskatchewan

The closure of the last of Dow Chemical’s Sarnia plants in 2008 will mark the end of the company’s 66 year presence in the community (it started in 1942). In a coordinated series of surprise announcements on 31st August, Dow said it would shut down all remaining operations in Sarnia and its chlor-alkali, ethylene dichloride (EDC) and related operations in Fort Saskatchewan .

The start of Dow’s problems in Sarnia was the closure of the Cochin Pipeline to ethylene shipments (see C2+Mar & May06). The company studied other transportation options but could not find anything viable. Once it uses up its stored ethylene, the low density polyethylene (LDPE) plant will have to shut down at the end of this month. The infrastructure and overhead costs of the site would then have had to be loaded on to the remaining three businesses. Dow decided that these additional costs made the businesses uncompetitive. Some observers criticize this logic as false accounting. Nevertheless, the polystyrene (PS) plant will close by the end of the year, and the acrylate latex and polyether polyols plants by the end of 2008. At the Fort, Dow had already closed its VCM plant earlier this year (this closure had caused the earlier shutdown of Oxy Vinyl’s PVC plant); it had kept part of its EDC operations going for export, mainly to Shintech in Japan . However, the plant is an old one, and it now appears that, with rail and shipping costs added to operating costs, it was simply not a profitable enough business. The caustic soda is sold mainly to local customers but these are not all that numerous.

Sadly, it appears that the LDPE plant had been slated for expansion. Evidently there had been some debottlenecking, since its capacity is now stated as 100 kta. AT Plastics has 145 kta of LDPE at Edmonton and Nova has 135 kta in Sarnia . Thus Dow’s closure removes 26% of Canadian LDPE capacity. Nova could pick up some of this business, although Dow will try to supply its customers from its Gulf Coast plants. The only other HIPS PS plant is Nova’s 60 kta operation in Montreal (there are also three small EPS plants); at 136 kta Dow’s is the larger and removes 68% of Canadian capacity. With overcapacity and low profitability in the industry, this closure will be welcomed by the other players. In the cases of acrylate latex (64 kta) and polyols (27 kta), Dow’s plants are the only ones in Canada and the customers will have to be

·         Dow exits from Sarnia, closes EDC at Fort Sask.

·         Lanxess reveals butyl rubber capacity in Sarnia

·         Race to commercialize cellulose ethanol

·         Williams continues quest for Alberta PP plant

·         Westbridge moves into Amcor Calgary site

Regular Tables

Ethylene, Polyethylene 

Styrene, Styrenic resins,

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supplied from the US . The latex is used in adhesives, protective coatings and traffic paint. Polyols are used in polyurethane foam for such products as auto seats, pillows, mattresses and furniture. In Alberta , the caustic customers will also have to be supplied from other sources. The EDC plant is the only one in Canada and its closure will simply mean that these exports will no longer benefit Canada ’s balance of trade.

The closures will mean that 550 people will lose their jobs. Of these 380 are in Sarnia and are made up of 340 Dow employees and 40 contractors. Of the 340, 215 are salaried and 125 unionized wage workers. At the Fort the numbers are 100 Dow employees and 70 contract (the workers are non-union at the Fort). The average age of the Sarnia workers is 47, implying that many are over 50, many with well established families in the community; they will face difficult choices between retiring early and relocating. Dow says that it will try to relocate some employees within the company and will provide outplacement help to the others. Dow changed its pension scheme some years ago, giving employees a choice between the old pension, which increased slowly up to age 50 and rapidly thereafter, and a new scheme, which increased on a more straight line basis. Employees under 50 who opted to stay in the old scheme will now fair worse than those who opted for the new one. The collective agreement between the Communications, Energy and Paperworkers Union and the company calls for 6 months notice of termination; this had not yet been given as we went to press. The agreement expires on 31^st January 2007 and the union will be working to get the best terms for its members that it can and to renew the agreement for the remaining workers through 2008. The union and others point out that each company job eliminated causes the loss of some three other jobs in the area.

The Dow site is a prime 300 acre piece of real estate sitting on the St Clair River. It has marine, rail and road access. It is next to the TransAlta cogen plant, giving it access to steam and power. It has its own waste treatment plant. Dow will work with the Ontario Ministry of the Environment to remediate the site to the standards required so that it can be sold. Close neighbors are Lanxess, Suncor and Nova. Rumors that half the site had been sold to Suncor are apparently false. Dow would prefer to sell the site as a whole. The Sarnia Lambton Economic Partnership has already bought Dow’s former head office on Modeland Road and 300 acres. It has a management agreement with the University of Western Ontario to manage the site and to run a program looking at bio-based plants that might locate there such as bio-diesel and ethanol (unfortunately, Northern Ethanol has already got a site – see story below). Presumably the Partnership might also acquire the rest of the Dow site.

Naturally, the financial analysts have taken a diametrically opposed viewpoint of the closures to the union’s. Analysts such as P.J. Juvekar of Citigroup and Kevin McCarthy of Banc of America Securities have commented that the closures will tighten up operating rates, allowing price increases that in turn will boost profitability and presumably make Dow’s shares more attractive. The view from Wall Street is a good deal rosier than that from Modeland Road .

In a wider context, commentators such as the Canadian Petrochemical Producers’ Association and the union have raised the issue of petrochemical industry access to feedstocks. They believe that government action may be necessary to ensure that sufficient feedstocks stay in Canada to ensure growth in the domestic industry and its downstream derivatives.

Dow Chemical Canada ’s closures

e = estimate

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OLEFINS

Lanxess presentation reveals butyl rubber capacity in Sarnia

Perhaps inadvertently, Lanxess has given more details of its ongoing expansion in butyl rubber at Sarnia and Antwerp , its two production sites for the world market (see C2+Sep05). An address by Dr Ron Commander, Head of the Butyl Rubber Business Unit, appeared on the web site on 14^th September. In it he said total capacity would increase 25% to 265 kta; that at Antwerp has already increased 10%; that at Sarnia will increase 42% by mid-2007. These percentages allow the reader to calculate that Antwerp has increased from 112 to 123 kta and Sarnia will go from 100 to 142 kta. These figures had not previously been revealed.

Tires form 86% of the demand for butyl rubber worldwide (Commander’s paper shows the other end uses and the split of tires by vehicle type). Within butyl, the regular type accounts for one third of demand and halogenated two thirds. Sarnia makes both regular and halogenated types. The regular type is employed in inner tubes for tires used in countries like India and China , where such tires are still in use, and certain specialty truck tires. The halogenated type is used in the inner linings of radial tires, which are gradually displacing tires with inner tubes throughout the world. Despite this trend, Lanxess is expanding both regular and halogenated capability at Sarnia so that they will still form the same proportion as they do now; over time it does expect halogenated to grow at the expense of regular.

Commander shows a bar chart with global butyl rubber capacities, unfortunately without a scale. Clearly ExxonMobil is the major supplier with four plants in the US , England and France . Lanxess is second; these two companies account for most of the world’s capacity. There are also two smaller companies in Russia , one in Japan and one in China . The Asian market is growing the fastest and Lanxess expects to sell 41% of its production in this region in 2006, up from 31% in 2004.

During Nova’s 4-month ethylene cracker outage at Corunna, lasting until January this year, the supply of mixed C4s to Lanxess was cut off. This can be seen clearly in the greatly reduced exports of butadiene last year (see table below). Lanxess has 120 kta of butadiene capacity. To some extent Lanxess was able to replace the Nova supply with that from Pétromont in Montreal . Normally Lanxess takes all that Nova produces and about 35% of what Pétromont makes. Commander’s paper suggests that the company signed a more formal long term contract with Pétromont as a result of the Nova problems. Lanxess may also have been able to source more iso-butylenes from the US , although the hurricanes severely disrupted butadiene production in the Gulf. Exports of halogenated rubber from Canada did fall some 10 kt last year, but those of regular butyl actually increased slightly.

In order to make halogenated butyl rubber, Lanxess dissolves the regular butyl rubber in hexane. For this purpose pure hexane is required. This not made by Imperial Oil and Shell, the two domestic suppliers. It is therefore imported, probably from ChevronPhillips. Although Lanxess’ consumption of hexane is not known, this usage partly accounts for the relatively large imports of hexane into Canada (see C2+Jun06).

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ExxonMobil said last year that it is doubling its capacity for its Exxpro specialty elastomers used in the construction of tire inner liners at Baytown , TX . The expansion will be complete by the end of this year. The company did not (and will not) specify what its capacity was doubling from. It said that the capacity would support the development of new, higher air barrier inner liners. The polymer used is a brominated isobutylene para-methylstyrene copolymer. The product is part of ExxonMobil’s Global Butyl Polymers business.

Lanxess also makes nitrile rubber in Sarnia , with an estimated capacity of 40 kta. Production was also impacted by the Nova outage. Thus Lanxess imported substantially more nitrile rubber last year (see table) in order to try and maintain its market share. Even so, some customers apparently moved away, either because of an actual shortage or an anticipated one. Lanxess is now trying to rebuild its market position. Nitrile rubber is used in hoses, primarily fuel hoses for automotive, industrial and aircraft applications. It is also used in gaskets, particularly in applications where oil resistance is needed. It is used as foam insulation for domestic water pipes, in shoe soles, in under-hood automotive applications and in a very wide range of other applications. Only 5-10% of Lanxess’ production is used in Canada , with the rest being exported. In North America the three main suppliers are Lanxess from Sarnia and Orange, TX; Nippon Zeon from Japan, with plants in Louisville, KY and Los Angeles; and Nitrilo-ParaTec Elastomers from Altamira, Mexico. In Europe, Lanxess is the main supplier, with a plant in Lawanzenau , Alsace , France . Another important player is Kumho in Japan , which mainly supplies the Asian market, but also exports some rubber to North America . There are some 30 smaller players, with 4-5 in China , 2-3 in Japan , 2-3 in Western Europe and others in Eastern Europe and Russia . Thus the bulk of the production of nitrile rubber is also concentrated in a few hands, but there are many more companies involved than in butyl rubber.

Last year Lanxess’ sales increased 5.5% and those of its Performance Rubber business by 17%. Its EBIT was also up substantially in both in total and in Performance Rubber. However, the company was still making losses, albeit smaller than in 2004. Its employees declined 7.5% to 18,282.

Canadian trade, butadiene and rubber

Source: Statistics Canada

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OXYGENATES

Race to commercialize cellulose ethanol moves into high gear

The race to commercialize cellulose ethanol technology and become a dominant player in this emerging market is moving into high gear. Industry participants say there are now so many announcements that it is impossible to keep track of all of them (See C2+Jul06).

SunOpta Inc of Norval , ON announced in August that it had sold a continuous process system, including its proprietary biomass conversion technology, to Celunol Corp of Dedham , MA . This company (formerly BC International) has two ethanol projects under way at Jennings , LA. It is developing a traditional 208 ML ethanol plant processing corn and grain sorghum but using biomass as fuel. At the same site it operates a cellulose ethanol pilot plant using fermentation technology and is planning a larger demonstration plant. The company has been working on its own technology using acid hydrolysis since 1997. It has developed its own enzymes capable of breaking down both C5 and C6 sugars. Its technology is described in general terms on its web site. It will produce lignin as well as ethanol.

Celunol had become aware of SunOpta through the latter’s work with Abengoa and others. The demonstration plant will combine Celunol’s technology with SunOpta’s expertise in designing and building cellulose ethanol plants. Celunol says that SunOpta has done impressive work on optimizing the equipment and layout of such plants. Possibly the SunOpta design will reduce the amount of higher alloy and stainless steel used in the pilot plant and thus its capital cost. Celunol aspires to build a portfolio of ethanol plants in the US and elsewhere. Its shareholders include Braemar Energy Ventures, Charles River Ventures, Khosla Ventures and Rho Capital Partners. Vinod Khosla in particular is well known as a general partner in seven funds at venture capital firm Kleiner Perkins Caufield & Byers, which has funded such companies as Google, Genentech and Sun Microsystems. Khosla now invests only his own money in ventures of his choosing. It appears therefore that Celunol has found an influential backer.

There are two different approaches to making cellulose ethanol: fermentation and thermomechanical/syngas. The major players such as Abengoa, Iogen, ADM and DuPont have all selected the fermentation route. Only a small number of relatively unknown companies have so far explored the other. One is Pearson Technologies of Mississippi, which is still trying to complete a commercial syngas plant in Aberdeen , MS . It has proven difficult to obtain financing for the plant, which began construction in 2001 and is still incomplete. Lately, a new investment vehicle, Mayflower Renewable Energy of Chicago, has become involved in trying to complete the financing. Xethanol of New York , NY is also working with the Energy and Environmental Research Center at the University of North Dakota to apply its Advanced Biomass Gasification Technology to the production of ethanol (see C2+Jun06). EERC has looked the various well-established syngas technologies around the world, which are used in large plants, and has invented a version suitable for small plants such as those making ethanol. EERC will not say how the technology will be adapted for ethanol production but says the use of catalysts is one option. The Saskatchewan Research Council has been working on catalysts for a syngas process, to be used in the Nipawin Biomass Ethanol New Generation Cooperative in Nipawin , SK ; but this project has languished for several years owing to disagreements among its participants.

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Another company going the thermomechanical route is Syntec Biofuel of Vancouver, BC. It is a private company consisting of a half dozen people plus consultants, who have contracts with the University of British Columbia and Simon Fraser University in Vancouver and with Brigham Young University in the US. The contracts enable them to use the universities’ laboratories. The company is primarily a developer of catalysts for syngas conversion to ethanol and other higher C2 alcohols. Syntec says that catalysts are the core of the syngas route and that only a handful of companies have expertise in this area. It took out a patent on the process in 2004 and is now further developing it, while searching for investors to build a pilot plant. Syntec says that its process will use a wider variety of biomass as feedstock, including softwood waste, which is extremely plentiful in BC because of the pine beetle infestation. It says that most other processes can utilize hardwood wastes but not softwood. Recently, there were plans for NetCo Investments to take Syntec public, but these fell through as NetCo was unable to raise the necessary capital, and Syntec reverted to being a private company. At some point we can expect a major company to jump into the syngas route to cellulose ethanol.

On the conventional corn ethanol side, Northern Ethanol is moving ahead with its ambitious plans for three 380 ML ethanol plants. The first two will be at Barrie, ON and Sarnia, ON, where sites have already been acquired, and the third in upper New York State, where a site is being evaluated. In Barrie, Golder Associates has completed its geotechnical assessment of the former Molson Brewery site and Delta-T Corp has visited the site and is currently designing the plant. Northern will file a site plan with the city of Barrie in November and expects to start construction next March. In Sarnia, a 36 acre site on the St Clair River has been acquired; it has access for marine transportation. It will also be getting steam from the nearby TransAlta cogen plant. Northern expects to start construction there in June. These plants will be twice the size of the recently opened Suncor plant in Sarnia, presently the largest in Canada. No doubt Northern is working hard to secure corn supplies. Northern is a private company and has received neither federal nor provincial funding. With Ontario's 5% ethanol mandate coming into effect next year, Northern’s timing seems right.

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POLYOLEFINS

Williams continues quest for polypropylene plant in Alberta

Will a polypropylene (PP) plant ever get built in Alberta (see C2+Apr05)? With North American demand slackening and projected large capacity additions in the Middle East and Asia, the prospects appear cloudy. Williams continues to negotiate with Dow and Nova, and could potentially bring some 110 kt of their propylene into its splitter at Redwater to add to the 70 kt it is already processing from Suncor’s oil sands operation. The three Edmonton refineries are apparently not interested in shipping a C3 stream to Redwater. But Williams is also talking to the six upgraders that are under construction, expanding or proposed for the area about the possibility of C3 streams: BA Energy (see C2+Aug05), North West Upgrading, Synenco Energy, Shell, Total and the Petro-Canada Fort Hills joint venture with UTS Energy and Teck Cominco. The smallest PP trains built today are around 200 kta, with 300 kta the average and 400kta the largest. Williams will likely need to assemble some more C3 before it can find a backer for what will probably be a joint venture. So far it does not appear that a lead partner and technology provider has yet stepped forward; the leading candidates being Dow, ExxonMobil and Basell. It would take a year for Williams to make the required modifications to its plant and another two years for the PP plant to be built. Thus it would be 2010 at the earliest before the plant could be in operation. By that time there could be a considerable capacity overhang in the Middle East and Asia (see below).

North American demand for PP grew 3.7% in 2005 to 7.5 MT according to APC statistics. In the first 8 months of 2006, demand is more or less flat with 2005 and there is debate whether exports are up or down. Thus total demand may also be flat. PP demand has increased at only 2.4% p.a. since 1999, when it was 6.5 MT, a far cry from the heady 6-7% growth rates of the 20^th century. Commentators are at a loss to explain the lack of growth this year. Most blame high propylene prices, in turn causing high PP prices. Propylene is currently in the unusual position of being higher priced than ethylene. Industry participants worry that, if C3 costs remain high in relation to C2, the traditional cost basis for PP may change. On-purpose C3 units could help alleviate the situation, yet nearly all of these are being built in the Middle East . Despite the high monomer cost, PP is still competitively priced against PE and there does not seem to have been much loss of applications to PE or other polymers. It is possible that imports of finished goods are eroding PP’s domestic share, yet it is hard to find statistics to bear this out. Others speculate that PP customers have simply reduced production until prices come down. Perhaps there will be a revival of demand in the last third of the year.

Philip Townsend Associates reports that prices for general purpose homopolymer molding grade PP were 57 cents/lb in January and have risen to a high of 69 cents in August; despite announcements of increases to cover the 2 cent increase in C3 prices in September, Townsend believes prices will either roll over or decline.

On the capacity side in North America, the only major increment is the 400 kta Indelpro joint venture in Mexico , scheduled up in 2008. Basell has a 200 kta plant in Bayport , TX , idled since 2001. Observers are divided on whether it will ever restart. If it does, it will likely be revamped. Debottlenecks are adding incremental capacity; CMAI estimates some 65 kt has been added this year and 140 kt will be added next. ExxonMobil now has 4 trains at Baton Rouge and its largest one was recently expanded to 400 kta. At 3% growth the market would require some 225 kt of new capacity a year and debottlenecks could supply a good proportion of this. Perhaps Basell will debottleneck its two Canadian plants, although it says it has no plans to do so. As with all petrochemicals these days, the bulk of new capacity is planned for the Middle East and Asia with some already under construction. CMAI data shows world PP capacity growing 65.7% from 32.3 to 59.2 MT (5.2% p.a.) from 2000 to 2010. During this period Sinopec is projected to remain No. 2 after Basell, but its capacity more than doubles, Sabic goes from nowhere to No. 3, Reliance/ICPL moves from No. 7 to No. 4 and its capacity more than triples, PetroChina’s capacity more than triples, as does that of Formosa. Observers believe, however, that many announced plans will be shelved once it becomes clear that the industry is headed for overcapacity.

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Basell started making its Metocene metallocene resins in at Bayport for the first time last year. It recently announced three new grades aimed at cast film and injection molding. Basell says its Metocene sales have increased by an “order of magnitude” since it began manufacture on this side of the Atlantic . It claims that its PP sales are bucking the industry trend so far this year and are up.

Huntsman has its whole monomer and polymers business up for sale, including its propylene and PP lines. The company says there are too many players in PP and further consolidation is bound to follow.

Since its decision to license its PP technology (see C2+Dec05), ExxonMobil has been actively pursuing potential licensees. It has several prospects in view and hopes to have an announcement soon. The company’s reasons for becoming the “new kid on the block” in the crowded field of PP licensing were, first, that it is an active PE licensor, both directly in LDPE and via Univation for LL and HD, and of other technology. The lack of PP was a hole in its portfolio, which sometimes put it at a disadvantage with potential licensees who wanted both polymers. Secondly, the company is good at buying the technology of others (in this case Basell and Mitsui) and improving on it. Thirdly, it is capitalizing on its experience in operating large PP trains of over 300 kta, where it claims an advantage over competitors such as Basell. Few companies have experience operating large PP trains. At 200 kta ExxonMobil’s technology would apparently be also-ran and would not justify the licensing fees. ExxonMobil uses its 385 kta Singapore unit as the demonstration plant for potential licensees. This plant has run at 99% utilization for five years, except for periods when the cracker is down for turnarounds. More than half of its production is copolymer, with a sophisticated gradeslate. The company notes that formerly it was the derivative plants that were down more than the crackers, whereas now the situation in Singapore has been reversed.

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AROMATICS

Westbridge moves into Amcor’s Calgary site, Encore expands

Westbridge PET Containers (see C2+Feb06) has doubled both its space and its output by moving from its former Calgary location into Amcor’s recently vacated site in the same city.  Amcor moved out over the summer and had 5 years left to run on its lease, which Westbridge took over. Westbridge bought some of Amcor’s equipment, mainly support machinery including chillers and compressors, and moved in its own equipment. The company now has 9 injection machines for preforms, 7-8 injection blow molding and 9 stretch blow molding machines with 2-10 cavities. The additional space allows it to double its output. Westbridge has taken over from Amcor the supply to the local Cott plant, a win-win for both Westbridge and Amcor, which supplies other Cott plants. It has also been able to take on some larger volume US customers who would not have been profitable before. Since the price of Asian resin has now equalized with that of North American, Westbridge has switched its purchases to Invista at Millhaven , ON , Canada ’s only PET resin plant. Supply by rail now takes only 9 days, whereas that from Asia took longer via ship to Los Angeles and rail from there.

Invista is now buying roughly half its PTA from Interquisa in Montreal and half from BP in the US . Imports were 83.3 kt last year and are running at a rate of 78 kt to July 2006. At a conversion factor of 0.87 from PTA to PET, it can thus be calculated that Invista was running close to its capacity of 195 kta last year and a little below that this year.

Encore Custom Preforms of Mississauga , ON has acquired a fourth 225 tonne Husky machine, which it will keep for unusual, experimental orders. When operational, it will replace an existing lab machine and will be used for low cavitation applications such as widemouth and heavyweight preforms. Encore supplies preforms to the stretch blow molding industry, focusing on custom markets such as detergent, dairy, alcohol, pharmaceutical, cosmetic and other specialty products. The company is unique in that it only makes preforms.

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A new water bottling company has appeared on the Canadian scene, Fernbrook Springs of Puslinch , ON . The company was started in 1984 by Irving Newman and Agnes Szechenyi in Shelburne , ON , which is still the source of the water. The couple sold the company recently to Bob Elliott, who moved the plant to Milton , ON . The company uses 15 liter bottles made of PET. These are recyclable but not returnable, as are the 15 liter polycarbonate bottles. It also uses conventional sizes. The company declines to say whether it makes or buys its preforms. It is a private company.

The PET resin industry continues to enjoy 7-8% growth in domestic demand, with 20% growth continuing in water bottles. Nestlé is now apparently the largest bottler and recently confirmed this enormous growth rate. Last year supply was disrupted by the hurricanes and the US became a net importer. This year the volume of imports is down, that of exports is up and the country could return to being a net exporter either in 2006 or 2007.  Trade flows may change as a result of capacity additions, however. North America is adding some 2 B lbs of new capacity in 2005-07 and Brazil is adding 1 B lbs. Brazil has essentially shut out imports by raising tariffs. Indorama added 100 M lbs at